Business Owners: How Good is Your Transition Game?

You’ve been at it for quite some time and you have developed a lot of expertise and specialized knowledge. You’ve done a great job of carving out your niche. No one knows more about how to make money in that business than you the owner.

You made a calculated gamble that paid off. You were smart to invest your money, sweat equity, talent, and time in your number one investment: your business.

To a certain degree, you never really needed a financial advisor, because as it turned out you were able to maximize your returns on investment in yourself and your business.

You became a successful business owner, which is no small feat, but now you wonder about your future. But at some point it begins to become clear that you cannot run a business forever.

For the most part, you have been successful in making your business prosper. Survived the ups and downs that inevitably come. You’ve reached the other side and are in a great position. You are a skilled and well-trained veteran in the world of practical business experience.

But what are the chances you have any experience in the game you are about to enter? The biggest game of your life. You are about to navigate between the offensive wealth-building years and the defensive wealth preservation years. You are in the “Transition Game”. For many business owners, this game is a quick one, but it includes the biggest payday of their lives: The day they sell their business.

Learning how to play the game can prevent a lot of frustration and can mean a far greater return on your most important investment.

You are starting to think about selling your business, but you are not sure about some key items:

How much is the business worth? How do you market the business? How do you determine whether the potential buyer has the funds required to close the deal? How can you determine how serious the buyer is? How does one negotiate the sale? Will the buyer need access to credit and how can that be facilitated? How to take payment(s)? How to invest the proceeds? Where do you go for the information to answer these questions?

If you have given serious thought to these questions, you, like many other owners of small and medium-sized businesses, are probably entering the transition state of your career.

A chartered business valuator (CBV) can help determine a reasonable value or worth from an objective, third party perspective. It can at least provide a starting point. There are a lot of “do’s and don’ts” but there are resources available. But this is one area where it pays to be informed and make sure things are done right. Here is a great resource to check out:

https://www.bdc.ca/en/articles-tools/change-ownership/sell-business/pages/how-sell-business.aspx

When it comes to valuation, another challenge I see is that people don’t truly understand what a lump sum investment can provide. If you are accustomed to a certain income that your business has been generating for you every month, don’t just assume the sale proceeds will provide for the same lifestyle. Also, many of your “personal” expenses might have been covered by the operations of the business and that isn’t going to be the case anymore. So it’s crucial to take the time to consider what that will look like.

Below is a very simple chart showing the investment of business sale proceeds at different rates of return. In each scenario, depending on how aggressively the proceeds are invested, you can see the annual income that would be provided (taxes are not factored in with this illustration). Keep in mind, this shows completely depleting the funds in 25 years with no money being passed along.

I help people who are about to enter “retirement”, which can look extremely different depending on the person, to figure out what they can reasonably expect as an income from the proceeds provided in the selling of a business. This will be impacted by investment vehicles used, tax environment used, risk tolerance combined with the absolute must have and non-negotiable wants in their golden years. It’s nice to know what that monthly number is going to boil down to before any huge decisions are made and a sale completed. Be prepared so that you don’t wake up one day and realize that you’ve burned through the proceeds or that you’re about to give a bunch back to the taxman upon transitioning assets to the next generation. All of this done right can mean keeping hundreds of thousands or even millions of dollars in your family’s pocket.